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Calculate the effective annual rate

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You take out a loan to buy a brand new car. The finance guy at the car dealership tells you the APR is 8%. Calculate the Effective Annual Rate (EAR) if the interest compounds annually, quarterly, monthly AND continuously.

  • Annual Compounding = ( 1 + 0.08 / 1 ) ^ 1 - 1 = 0.08 = 8%
  • Quarterly Compounding = (1 + 0.08 / 4 ) ^ 4 - 1 = 0.0824 = 8.24%
  • Monthly Compounding = (1 + 0.08 / 12 ) ^ 12 - 1 = 0.083 = 8.3%
  • Continuous Compounding = e ^ 0.08 - 1 = 0.0833 = 8.33%

Reference no: EM131101107

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